Nonprofit Variable Pay

PROBLEMS OF VARIABLE PAY

Evidence indicates that variable pay plans can improve employee performance, but there is also evidence that they can have dysfunctional consequences. If this were not true, variable pay plans would undoubtedly be more popular than they are. The problems of variable pay plans fall into two categories: practicality and perception.

Let's take a look…

Problems of Practicality

There are many things that may be possible with variable pay plans, but they may not be worth considering because the cost is too great — either directly or indirectly.

Variable pay plans may not achieve their purposes. Employees may be concerned that management will change the performance standard if they improve their performance. Plus, if employees work harder, they may actually work themselves or others out of a job.

The competition conundrum

Competition created by individual variable pay plans can cause serious problems if the work calls for cooperative effort. People can be expected to exhibit behavior that is rewarded, and cooperative behavior is not rewarded or recognized under an individual variable pay plan. In fact, it has been suggested that variable pay plans cause employee resentment because they reward only effort, although employees know that many other contributions are required by the organization. A problem implied above is the high administrative cost of a variable pay plan. There is no question that determining standards, measuring outcomes, and maintaining the plan are more costly and difficult than administering a pay-for-time-worked plan. However, productivity increases certainly can be expected to offset these additional costs.

Pay inequities

Another problem in using variable pay plans is the tendency for internal pay and salary relationships to become distorted, such that lower-skilled variable pay-based workers may earn more than high-skilled workers not under the plan.

The numerous changes that accompany the implementation of a company-wide plan make determining the source of results especially difficult.